Archive for June, 2009

The global population is aging and that is a bad trend for healthcare costs.

There’s no question healthcare reform is required. The Economist’s cover story, This is Going to Hurt,addresses this problem head-on:

“Even though one dollar in every six generated by the world’s richest economy is spent on health—almost twice the average for rich countries—infant mortality, life expectancy and survival-rates for heart attacks are all worse than the OECD average. Meanwhile, because health insurance is so expensive, nearly 50m Americans, an obscene number in such a rich place, have none; those that are insured pay through the nose for their cover, and often find it bankruptingly inadequate if they get seriously ill or injured.”

The real question is not whether we have a problem, but rather how are we going to approach it? Estimates of the current healthcare congressional plans put estimates for reform between $1.2 trillion and $1.6 trillion over 10 years. I tend to side with George Will when discussions center on costs, “If you think health care is expensive now, just wait until it is free.”

One of the reasons healthcare costs are exploding is because of our aging demographics. The 76 million “Baby Boomers” are entering their golden years, and as a result are consuming more healthcare products and services. Because our system is so convoluted and opaque, true healthcare competition cannot flourish. Rather, patients expect a cheap “all-you-can-eat” smorgasbord of services without consideration of cost. Unfortunately, the aging trend of our global population (especially in the developed countries like the U.S.) has put our economy on track for a disastrous train-wreck.

TheEconomist’s article, A Slow Burning Fuse, crystallizes the aging trend into proper perspective by providing some interesting statistics. At the beginning of the last century, in 1900, the average life expectance at birth was approximately 30. Today, the average life expectancy has more than doubled to 67 years (and 78 years in richer developed countries).

A second major cause of aging societies is the decline in number of children families are having. During the early 1970s, women on average were having 4.3 children each. Now the average is about 2.6 children (and 1.6 children in developed countries). What these statistics mean is that the taxable younger workforce is shrinking (growing slower), therefore unable to adequately feed the swelling appetites of the aging, healthcare-hungry global populations.

My solution would focus on the following:

Technology: Yes, chopping down trees, wasting years of our lives filling out and storing library-esque piles of medical forms is so 20th Century.

Consolidation of Insurers: And do we need dozens of different insurers on different billing platforms? Reducing inefficient and undercapitalized competitors down to a common technological digital record and billing platform makes common sense to me. Although I love competition, if I look at things like cell phones, cable, or even local grocery stores, there is a law of diminishing return whereby inefficiencies eventually outweigh benefits of competition.

Fewer Late Life Benefits: Nearly 30 percent of Medicare spending pays for care in the final year of patients’ lives, according to George Will. Does it really make sense to pay such a high proportion of costs for the last 1-2% of our lives? Other countries, including European ones, deny certain costly services for elderly patients. Does spending over $50,000 on certain cancer treatments for a few extra months of life seem equitable? If elderly ill patients are in the financial position to pay, then that’s great. Otherwise, at some point, the ethical question has to be faced – what is an extra month of human life worth?

Not really a rosy subject, but an important one. I’m confident we can solve these problems, if addressed immediately, or else future generations will be saddled with a more disastrous problem to heal.

The U.S. House of Representatives passed The American Clean Energy and Security Act of 2009 (ACES), also named the “Waxman- Markey” bill, by a 219-212 vote. The masses are calling it the “Cap and Trade” bill, while detractors are blasting it as the “Cap and Tax” bill.

Joe Petrowsky, CEO of Gulf Oil, sees this bill costing businesses $50-100 per ton of carbon created, which will be passed through as a tax to energy consumers in the form of an annual $1,000+ tax (about $250-$350 per individual). Robert Murray, CEO of Murray Energy Corporation, calls it a $2 trillion tax on consumers over 8 years.

The House passed this bill just as the economy is shuttering on its knees and a rising skepticism is brewing over the validity of global warming – see Kimberley Strassel’s, journalist at The Wall Street Journal, article entitled, The Climate Change Climate Change dated June 26, 2009. Australia is in the process of killing its “Cap and Trade” proposals and many critics point to Spain’s failing carbon initiatives and 18% unemployment as evidence for the program’s shortcomings.

Despite one’s views on the validity of global warming, what cannot be disputed is our reliance (addiction) to oil as we import 70% of our oil demand. Is the time and scope of this bill the silver bullet for our crude dependence as we try to survive through this “Great Recession?” I think not.

Billions of humans across the globe are aspiring to achieve our standard of living here in the U.S., so even those against a “Cap and Trade” system, including myself, need to appreciate the massive energy investment we need to make. The U.S. is considered the “Saudi Arabia” of coal due to our vast reserves, and therefore we must find efficient and cleaner ways to use this abundant commodity. We need to throw the kitchen sink at nuclear, wind, solar, hydrogen, bio-fuels and other alternative energy technologies, even as we look to expand our fossil fuel resources.

But rather than forming randomly created silos of hoarded research across hundreds of universities, why not create domestic centers of excellence that collaborate with both academic and private sector participants. By integrating monetary incentives (i.e., exclusive commercial patent rights), incredible advancements and breakthroughs can be achieved. Historically, when the United States has focused on a task, we’ve been able to achieve greatness – for example sending a man to the moon. Heck, recently NASA mastered the art of converting urine into water!

Bold new steps need to be taken to solve our energy crisis, but I’m afraid this “Cap and Tax” bill is not the right answer.

Water engulfs our daily lives – we drink, bathe, wash clothes, soak our lawns and brush our teeth with it on a consistent basis. We notice our reliance in our monthly water bills. The earth is covered by approximately 70% water, so if this commodity is so abundant, then how could it be such a scarce, valuable resource? Water is so important; the majority of our body mass consists of the fluid (about 60% in males and 55% in females). Although our planet is covered with this liquid, the main problem surrounding the issue is that only about 2% of the water supply is considered fresh water (predominantly located in Antarctica). Desalinization of salt water is one solution to the limited amount of fresh water, but unfortunately the current technology and energy requirements make it a cost prohibitive process. As a result of the inadequate supply, over an estimated 1 billion people do not have access to clean water and 2.4 billion people are subject to stressed water conditions.

In the “Golden State” of California, budgetary problems are not the only concern on people’s minds – the state is in the middle of a water shortage. Certain water jurisdictions are escalating prices by upwards of +15%. Regardless of your view on “climate change,” objective data points to declining water levels and heightened scarcity. By 2030, OECD predicts that half of the world’s population will live in areas under severe water stress.

I’m certainly not the only believer in this theme as an investment opportunity. T. Boone Pickens, renowned commodity investor, is spending over $100 million on water investments (including access to water rights) because he believes that H2O is the next oil. Water, like oil, is a depleting resource that will experience intensified demand over time.

How to Invest in Water:

Not everyone has millions of dollars like Pickens to invest in land and water rights, so there are different ways for the average investor to participate in the rising demand for water. For example, investors, like Sidoxia Capital Management, can invest in ETFs (exchange traded funds) with a water focus. ETF options include, PowerShares Water Resources (PHO), PowerShares Global Water ETF (PIO), and/or Claymore S&P Global Water (CGW). For those wishing to invest in individual stocks, some water related companies include, Nalco Holding Company (NLC), Danaher Corporation (DHR), Itron Inc. (ITRI), and Valmont Industries, Inc. (VMI).

Water Demand Drivers

The globe’s population of approximately 6.5 billion people is growing and becoming thirstier. Water demand is expanding much faster than population growth.

Climate change exacerbates the growing water supply problem.

Agriculture and irrigation needs are driving the majority of global water demand.

There is no substitute for water at any price.

Conservation, technology, and efficiency are tools to improve the usage of our finite water resources. As the water problem becomes more acute, profiting from water investments is a way to offset the inevitably higher costs of usage. Now if you’ll please excuse me, I’m thirsty for a glass of water.

DISCLOSURE: At the time of publishing, Sidoxia Capital Management and some of its clients owned certain exchange traded funds (including PHO & CGW), but had no direct positions in PIO, CGW, NLC, DHR, ITRI, VMI, or any other security referenced. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

The only way you get to save dollars is by saving nickels and dimes, so if saving overpaid bureaucrat wages requires Governor Arnold Schwarzenegger sending pooches to doggy heaven a little early, then so be it. California’s Legislative Analyst’s Office seems to believe $23 million can be saved by accelerating the pet euthanizing process for sheltered pets by three days.

Riding the California housing train was an enjoyable ride in California as home prices more than tripled from the late 1990s until the beginning of 2007. However, after rolling in piles of house tax collection receipts from exploding prices, the bubble based binge of tax revenue has now come to a screeching halt as home prices have declined by more than 50% from peak levels a few years ago (see chart below). Facing an 11.5% unemployment rate, the state is being kicked while it’s down on the ground – income tax collections are declining and businesses dealing with the relatively high cost of operations forcing businesses to run for the hills and leave the state.

Things obviously appear gloomy in California, but the Governator is showing his resolve to get the job done – as evidenced by his contemplation of the pet destruction option. My dog is sleeping inside tonight.

You too can get your name plastered across a university (or online) for a measly $2 million. That’s what Jack Welch did when he purchased a 12% stake in the primarily online Masters of Business Administration Program (MBA) of Chancellor University. The name of the school according to The Wall Street Journal will be the Jack Welch Institute (JWI).

According to the WSJ:
Boston research firm EduVentures Inc. estimates that 11% of the roughly 18.5 million U.S. college students took most of their classes online in the fall of 2008, up from 1% a decade ago.

Online higher education will generate revenue of $11.5 billion this year, EduVentures says. But “there is a concern about quality,” says EduVentures Chief Executive Tom Dretler, because there’s “much, much less selectivity” of students in the admissions process.

So what does a Jack Welch student receive upon graduation – a diploma or a General Electric (GE) Six Sigma Black Belt? And what about Jack’s hard-nosed, no-nonsense business approach? Will all students learn how to negotiate like Jack, especially when it comes to retirement perks? The $21,000 tuition bill sounds steep on the surface, but well worth it if graduates can finagle exit package perks like Welch’s $86,000 a year consultant fee, use of an $80,000 per month Manhattan apartment, court-side seats to the New York Knicks and U.S. Open, seating at Wimbledon, box seats at Red Sox and Yankees baseball games, country club fees, security services and restaurant bills (The New York Times), not to mention a limousine, a cook, free flowers, country-club memberships and a charge account at Jean Georges restaurant.

The U.S. recently scheduled talks with the Chinese government to discuss the appropriateness of automated personal computer (PC) content filtering (including, pornography, Falun Gong, and governmental protest content). Falun Gong is a meditatitve spiritual discipline frowned down upon by the Chinese government.

I can picture it now, U.S. officials calling up Chinese President Hu Jintao and saying, “Hey Hu, why not lighten up a bit on the freedom crackdowns – what’s the big deal with a little pornography and anarchy?” The Chinese government feels that in the absence of structured laws, which would limit access to inappropriate content, the natives will become restless and ultimately disruptive. PC manufacturers would prefer not to reengineer PCs and increase the embedded costs to consumers by adding additional components. However, given the size of the Chinese PC market, the dominant foreign manufacturers are likely to cave to Chinese government demands, given the massive long-term potential of this Asian market. We have already seen Google (GOOG), Yahoo (YHOO), and Microsoft (MSFT) make concessions to the Chinese government in the algorithmic search arena.

The thematic parallels presently occurring in China apply to William Golding’s Lord of the Flies (1954) as well. Lord of the Flies is a story about a group of stranded kids (surviving a plane crash) that battle for survival on a deserted island. Due to the lack of law, adult supervision and questionable tendencies, all hell eventually breaks loose. The Chinese government, managing a population of 1.3 billion people, fears a similarly hellacious outcome if an uncontrolled, lawless population consumes unfettered, unhealthy content. Given mistakes we’ve made abroad (e.g., Abu Ghraib, and Guantanomo), the Chinese and other countries are questioning the strength of our moral compass in judging or guiding other countries’ policies.

Although the U.S. government’s intentions are in the right place to protect the personal freedoms of people globally, we are not currently in the strongest moral position right now to cram our beliefs down other’s throats. Even the freest of societies such as our own limits certain actions – such as underage voting, underage drinking, and public nudity (O.K., I’m stretching a bit).

Regardless of your political views, one can appreciate the fear of anarchy in the hearts of the Chinese government. Practically speaking however, given the openness and rapid expansion of the global internet, the Chinese can only slow the expansion of individuals’ freedoms – recent events in the Middle East just provide additional evidence to this premise.

DISCLOSURE: At the time of publishing, in addition to owning certain exchange traded funds, Sidoxia Capital Management and some of its clients also owned GOOG, but had no direct positions in YHOO, MSFT, or any other security referenced. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Although Doug Kass, founder and president of Seabreeze Partners, has historically been primarily a dedicated short-seller, he presciently called the market low in March 2009 (what he now calls a “generational low”). Like in the movie Back to School starring Rodney Dangerfield, Doug Kass is trying to successfully execute the impossible “Triple Lindy” dive of his own. Thus far, Kass has completed the first two legs of the dive by accurately being bearish in late 2007 and subsequently bullish at the recent market bottom in March 2009. Now he sees, “potholes on the road to higher prices,” and he thinks we will be stuck in neutral for quite a while.

Like other prognosticators, I feel like Mr. Kass is trying to have a little of his cake and eat it too, since he previously called a run to 1,050 (S&P was at 942 on 6/4/09) and now he has adjusted his posture to a neutral stance. Therefore if prices move upwards, his previous 1,050 call is firmly in place, and on the other hand if we move sideways or downwards, then his neutral prediction is still in play.

The "Triple Lindy" Dive

As one of the American judges, I give Kass a score of 9.0 regardless of whether his squishy call for a potential double-dip (consumer led recession) comes to fruition in late 2009, or early 2010. Congratulations Doug on completion of the first two sequences of the Triple Lindy!